By Foluke Akinmoladun
The term sheet details the amount of the loan, repayment schedule, interest rate, duration of the loan and any other fees related to the loan. The arranging bank holds a large proportion of the loan and as the lead manager will be responsible for distributing cash flows among the other participating lenders.
In order to avoid the logistical difficulties that can be faced by the borrower and the lenders, the participating banks assign the task of dealing with the borrower and managing day-to-day running of the loan throughout the life of the loan to a bank called the Agent.
The agent in a syndicated loan serves as a link between the borrower and the lenders and owes a contractual obligation to both the borrower and the lenders. The role of the Agent to the lenders is to provide them with information that allows them to exercise their rights under the syndicated loan agreement. The agent has no fiduciary duty and is not required to advise the borrower or the lenders. The agent’s duty is mainly administrative and mechanical in nature.
Whilst the agent under a syndicated loan agreement has various duties, tasks and authorities, it is generally accepted in the syndicated loan market that so long as the agent carries out those functions with reasonable skill and care, the agent should be protected from any loss or liability in carrying out those functions.
In a syndicated loan, all of the security (including the mortgage over the ship, share security, account security and assignments of earnings and insurances) is held by a trustee on the behalf of and for the benefit of all of the lenders from time to time. Syndicated loan structures avoid granting the security to the individual lenders separately since the practice would be costly to the syndicate.
In the event of default, the trustee is responsible for enforcing the security under instructions by the lenders.
Therefore, the trustee only has a fiduciary duty to the lenders in the syndicate. Other powers of the Trustee includes, negotiating with the borrower on deviations if any; approve waivers in respect of minor breaches by the Borrower or initiate legal action in case of significant breaches or infraction by the Borrower.
When the participation in a syndicated loan is assigned by one lender to a new lender, the corresponding beneficial interest in the security is assigned with it, but the trustee continues to hold the security for all of the lenders and all that has changed is the identity of the group of lenders.
A syndicated loan is a loan that is given by a number of banks to a single borrower. The banks involved are commonly referred to as a syndicate. Banks engage in syndicated loans because it helps them diversify their risk and take on financial opportunities that would have otherwise been too big for their capital base. For borrowers, it allows them to seek for and get higher leverage. Higher leverage can bring about a higher rate of return. The main parties in a syndicated loan therefore are the borrower, the arranger/lead bank, the trustee, the agent and other participating banks.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com